WTO rules some EU subsidies to Airbus illegal

ChristopherHinton

AudeLagorce

NEW YORK (MarketWatch) -- The World Trade Organization on Wednesday faulted the European Union for providing cheap loans to Airbus to help lower its cost for developing new airplanes and take market share from Boeing Co.

It's a clear victory for the Chicago-based manufacturer, providing the company with precedence to disrupt similar funding for the up-and-coming A350XWB, which will compete with its 787 Dreamliner. It could also help the company to score a $35 billion U.S. contract to replace the military's aging aerial-refueling fleet.

"The ruling shows the WTO works and it can understand the aerospace industry," said Teal Group analyst Richard Aboulafia, who praised the group's decision. "It will take a long time for it to filter down to concrete change, but it provides a framework and a strong endorsement of the U.S. view."

Eventually there could be a negotiated settlement, which could be a potential game changer for the global aerospace industry currently dominated by Boeing and Airbus, but which is gaining entrants from Brazil, Canada and China.

In the 1,000-page report the WTO called for immediate end to the subsidies, but Airbus noted the dispute could continue on for a few more years. Eventually the company could be forced to pay back some of that funding.

Up until the end of 2006, the U.S. alleged Airbus received up to $100 billion in member-state financing, though the WTO considered that calculation "fundamentally flawed."

The report did back Airbus claims in other areas and ruled against 70% of Boeing's complaints.

"These results are in line with the previous versions of the WTO panel's findings. Airbus, the EU and the Member States are closely analyzing the report in advance of a possible review by the WTO Appellate Body," said Rainer Ohler, Head of Public Affairs and Communications of Airbus.

The group rejected U.S. claims that the illegal subsides significantly undercut its prices or caused the loss of jobs, or that the E.U. provided launch aid for the A350.

It also determined that the European reimbursable loan mechanism, on which Airbus heavily relies to develop new aircraft, was legal and compatible with international trade rules. These loans are virtually risk free to the manufacturer as it only has to repay them as new planes are sold.

The mixed ruling will therefore allow Airbus to claim some victory and allow it to secure funding for its A350 XWB program.

But it will haunt an already-fierce contest to build the U.S. military's next-generation aerial-refueling tankers. The ruling would provide Boeing's congressional allies a means to pressure the Pentagon in crafting a proposal request that takes subsidies into consideration.

"The House Defense Appropriations subcommittee can now say this legitimizes our preferences that the Pentagon must apply considerations when judging the bids," said the Teal Group's Aboulafia.

Bids for the tanker contract are due early next month, with an announcement expected in November.

"The ruling establishes an overarching principle governing all those entering aerospace markets. Anyone that wants to use government funding arrangements to develop new, competing products must demonstrate that monies are provided on proven commercial terms," it said.

Boeing said that the ruling not only makes clear that there can be no new government-subsidized financing for the A350 XWB, but also clarifies rules for new entrants.

In its original complaint filed in 2004, Boeing argued that Airbus was no longer the fledging player it was when a deal was struck allowing it to receive up to a third of the development cost of new airliners from Brussels.

On the same day Airbus filed a counter complaint accusing the U.S. of buttressing Boeing by funneling subsidies through military research funds.

The WTO is expected to issue an initial confidential report in July on the EU's counter complaint.

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